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BP-Rosneft Deal Worst-Case Scenario

The landmark share swap and Arctic exploration deal between BP and Russia's state-owned oil company, Rosneft, is at risk of falling apart thanks to TNK-BP, the UK company's other Russian partners who have successfully blocked the venture with a temporary injunction. BP has asked an arbitration panel if it can at least proceed with the $7.8 billion share swap as long as it scraps plans to explore in the Arctic. Still, that hasn't stopped rampant speculation over what will happen to BP if CEO Bob Dudley fails to salvage the alliance.

Conventional wisdom tells us the worst-case scenario for BP would be if the deal totally fell apart. After all, the Rosneft-BP share swap announced in January would give BP exclusive access to 125,000 square kilometers of the South Kara Sea, an Arctic region the size of the North Sea that holds an estimated 35 billion barrels of oil. This alliance is key to BP's long-term growth strategy.

But let's take another less conventional approach. Assume that Rosneft chairman Igor Sechin and Dudley magically get the deal done. What could possibly go wrong? Could a successful tie-up lead to an even less desirable outcome than say, a failed deal? It's worth at least a momentary mull, considering BP's joint venture with its Russian oligarchs over at TNK-BP has been far from a pleasure cruise.

Direct foreign investment shrank 13.2 percent last year, according to Russia's Statistics Service. The global recession was partly responsible. But the country's unfavorable tax system, corruption and overall economic uncertainty also kept many foreign investors away.

Prime Minister Vladimir Putin has ordered the Russian government to push foreign investment to $70 billion a year. That hardly means Russia will suddenly offer foreign companies loads of incentives and concessions. And while many may find this encouraging, Putin and the government have changed the rules mid game before. Take the case of Lennart Dahlgren, the former CEO of IKEA Russia, who battled the country for more than a decade. The retailer did invest some $4 billion in Russia, but ultimately these fights took its toll. Last year IKEA announced it was halting its expansion plans because of problems with bureaucrats, Foreign Policy reported.

And then there's the considerable power of Rosneft itself. Lest we forget, Rosneft is owned by the Russian government. Sechin, aside from his chairman role at the company, also is the country's deputy prime minister. And that could be problematic for BP down the line. BP could find itself deeply ingrained in an offshore Arctic project with Rosneft, which is eager to acquire the company's technical expertise, only to have it yanked away.

Or there's another possibility. BP could find itself having to offer current partners TNK-BP a far larger sweetener than it intended to salvage the deal with Rosneft. That could mean giving up a greater share of its 50-50 joint venture with TNK-BP. At stake is BP's operations in Russia, which account for one-quarter of its global oil and gas production and close to a fifth of its reserves.

Photo from BP
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